AIG Makes Changes to Compensation Structure

The insurance giant, American International Group (AIG), is in the news again. But this time not for using federal bailout money. AIG has just launched a new system to determine how executives get incentive pay. This move follows the public outcry over retention payments the bailed-out insurer made to some staff.

Under this new system, being pushed by AIG's Chief Executive Robert Benmosche, AIG will rank employees on a scale of 1 to 4. The ranking is based on how the employees do relative to their peers.

The top rank will only go to 10% of the employees, who will be eligible to receive higher incentive pay. Ranking number 2 will go to 20 percent of the employees and rank 3 will given to 50 percent. Employees ranked as a 4 will get minimal incentive pay.

This new system will apply initially to several thousand of AIG's roughly 100,000 employees for evaluating performance in 2009, with the insurer planning to roll out the system across the company over time.

Executives are hoping that the rating system will help ensure that the employees are accountable, recognized and rewarded for their achievements. Furthermore, the company believes this move will help them remain competitive and ensure a strong enterprise.

This new system is much like a plan introduced by Jack Welch at General Electric. Aside from GE, current users of the forced distribution system include investment bank JP Morgan. Even though the system is widely touted as one that is excellent in terms of promoting right talent to the top as well as a means of weeding out of the underperformers over a period of time, it has also been credited to be the cause of unnecessary anxiety among the employees. Employees who are on the bottom will be worried about being fired even if they don't deserve to be.

This new system is a step in the right direction after AIG accepted the $182.3 billion of US taxpayer-funded aid. AIG has faced public outrage over retention payments it made to employees of its Financial Producs Unit, which was behind the insurer's near collapse in September 2008.

AIG was contractually obligated to payout $165 million to employees of the Financial Products Unit last March and this month they're paying out $100 million in retention payments. Additionally, they are expected to pay about $75 million by March 15th.